How Facebook Will Squeeze $19 Billion Out of WhatsApp

Image: Josh Valcarcel/WIRED

The $19 billion Facebook just paid to acquire the WhatsApp messaging service is a staggering figure. But it’s even more shocking when you consider the many reasons that WhatsApp could be a financial dead end.

Yes, 450 million people use WhatsApp to send messages and photos on their phones, and an extra million are joining with each passing day. But the tiny Mountain View company has said it won’t sell ads on its service, and even if that changed, many of those 450 million users are teens and other cost-sensitive people in foreign countries — people tricky to sell ads against.

Yes, WhatsApp charges for the use its service. But it charges each user only a dollar a year, and in acquiring WhatsApp, Facebook is paying whopping $42 per user. The company could charge people more to use the tool, but then they’d just leave for another messaging service.

In short, there’s no immediate way to make money. But Facebook is playing the long game. “We believe that once we get to being a service that has 1 billion, 2 billion, maybe even 3 billion people one day, that there are many clear ways that we can monetize,” Facebook founder and CEO Zuckerberg said this week on a conference call with Wall Street analysts.

What are those clear ways? It’s not exactly, well, clear. What we can say is that Zuckerberg wants to capture the maximum number of users before trying to wring money out of the service. That worked with Facebook, but then Facebook always looked like a perfect ad machine. WhatsApp’s future is far more hazy, especially after Zuckerberg seemed to close the door on the ad discussion, echoing WhatsApp in saying that he doesn’t believe in advertising on messaging services.

The play here is more complicated — and even more ambitious. But ultimately, it comes back to this: Whatever Zuckerberg says today, WhatsApp will eventually make its money through what are essentially ads — if it makes any money at all.

‘Disrupting Itself’

With the WhatsApp buy, Zuckerberg and company certainly expand their reach. Yes, the company already runs on mobile phones, and it offers multiple messaging services. But WhatsApp gives it access to teens, who have started to move away from Facebook, and it provides a new foothold in various international markets, including India, Brazil, and Mexico.

“Text messaging has become the language for how the world communicates,” says James Citron, the president of Outpsoken, a company that sends text messages on behalf of companies like Jack in the Box and Vans.

It looks like most of the 450 million people on WhatsApp are using the service in lieu of Facebook. It serves as a kind of stripped-down mobile social network. In country’s like Spain and India, it gives people a quick and easy way of communicating without paying heavy SMS fees to local wireless carriers. In many ways, it looks like the future of the social network — one that’s not only always with you, but wonderfully simple to use.

Zuckerberg realizes this is the future, and he’s grabbing it. Facebook is “disrupting itself” before someone else disrupts it. It seems that Google was looking to buy WhatsApp for about $10 billion, and Zuckerberg beat his main rival to the punch. WhatsApp’s biggest competitor, Viber Media, sold for $900 million to Japanese internet company Rakuten just last week.

But messaging still needs a business model.

Teens Get Older

The good news is that, although WhatsApp users aren’t the sort of people who can generate vast amounts of revenue today, that will change. Teens will get older. Foreign populations will grow more affluent. And if the number of WhatsApp users expands to 1 billion people, which is no stretch, there will certainly be money there for the taking.

But how do you do that without advertising on the service? One thing’s for certain: You can’t start charging a hefty fee for thing. The price of messaging is only going down, and it will drop even further as our wireless pipes grow. Facebook can’t push things in the other direction.

What the company can do is use WhatsApp to feed the larger Facebook universe. Facebook will continue to serve ads on the web and, yes, on mobile devices. Zuckerberg may say he’s opposed to ads on messaging services, but he and his company are already developing new ways of targeting ads on all sorts of other mobile apps — apps from both Facebook and third-party companies. WhatsApp could be a way of improving ad targeting on these apps. Through WhatsApp, Facebook can see who people are communicating with and how. That information can be used to hone ads on other platforms.

“Future users might be given the option to link their WhatsApp account to their Facebook profile,” says David Rogers, who teaches digital marketing at Columbia Business School. “If users did this, it would certainly add additional data to the extremely rich data sets that Facebook is monetizing via advertisers.”

The rub is that Facebook must find a way of encouraging these links without turning people off. That can certainly be done. But it might be difficult, especially when you consider that many of those using WhatsApp aren’t spending much time on Facebook today. And it’s hard to tell how valuable the extra data from WhatsApp would be. Is it worth $19 billion — even in the long run? Maybe not.

When Advertising Isn’t Advertising

But according to Citron, the president of messaging outfit Outspoken, there are options. For one, Facebook could cultivate WhatsApp as a place where people not only communicate with each other, but actively sign up to receive regular messages related to stuff they’re interested in. For example, the shoe company Vans recently launched an opt-in multimedia messaging subscription that provides snowboarding information to anyone who wants to hit the slopes or watch videos of tricks in action.

Facebook could also let devoted shoppers sign up for alerts about new products or special offers from the brands they love most. Or it could turn WhatsApp into a kind of e-commerce engine: Noticing that you’re texting your friends about watching the Super Bowl, WhatsApp could helpfully suggest some nearby pizza places and take a cut of the order.

In describing these options, Citron uses terms like opt-in sponsored content and context-specific suggestions. He says that they’re not advertising per se, that they’re more “organic” than advertising, that they dovetail with the way messaging works. “This is the device you’re talking to your closes friends and family on,” says Citron, whose company worked with Vans on its messaging campaign.

Of course, they look and sound and feel a lot like advertising. And they just might provide Zuckerberg and company with a new revenue stream on WhatsApp. In other words, although Facebook says it won’t recover its $19 billion with advertising, it could use something very close to it.